An application of cost risk in incentive contracts.
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Authors
McGrath, Christopher Michael
Subjects
cost estimates
incentive contracts
motivation
cost analysis
risk analysis
incentive contracts
motivation
cost analysis
risk analysis
Advisors
Greer, Willis R. Jr.
Date of Issue
1985-12
Date
December 1985
Publisher
Language
en_US
Abstract
This paper begins with an examination of the literature
concerning incentive contract effectiveness and contractor
motivation. Citing the most frequently supported conclusions, the
researcher integrates these with a cost risk analysis methodology
based upon the Beta distribution. The result is a share curve
that automatically adjusts the share ratio based upon estimated
cost variance.
The researcher suggests that this approach is better at
reflecting cost risk than the standard linear design. The share
curve provides more risk sharing, especially at higher levels of
cost variance, and provides both significant rewards and
penalties only for significant deviations from target cost. The
final conclusion is that the share curve mitigates the defense
contractors' "risk averse" nature, thus allowing the profit
motive to become operative in incentivizing the contractor to
control or reduce costs.
Type
Thesis
Description
Series/Report No
Department
Administrative Sciences
Organization
Naval Postgraduate School (U.S.)
Identifiers
NPS Report Number
Sponsors
Funder
Format
95 p.
Citation
Distribution Statement
Approved for public release; distribution is unlimited.
Rights
This publication is a work of the U.S. Government as defined in Title 17, United States Code, Section 101. Copyright protection is not available for this work in the United States.